Raising Eligibility Ages Is Good for the Budget...and the Economy

Over the past couple of years, we've been arguing that raising the Social Security and Medicare ages could be an important part of a fiscal reform agenda. In prior posts, we've showed that increasing the Medicare age would protect--and indeed increase benefits -- for the most vulnerable, increasing the Social Security normal retirement age is actually somewhat progressive, and increasing the Social Security early retirement age can help increase benefits for older workers. We've also shown that these policies could lead to substantial budgetary savings and could help grow the economy by encouraging work and savings.

But now readers no longer need to take our word for it, since CBO just released their own report on Raising the Ages of Eligibility for Medicare and Social Security. In evaluating the effects of various age increases, the report finds that raising the Social Security earliest eligibility age (EEA) and normal retirement age (NRA) and raising the Medicare eligibility age (MEA) would reduce the deficit, encourage work, and increase the size of the economy.

^{*Includes effects of changes on GDP and revenue;
#CBO cannot determine size or direction of interactions}

Increasing the Medicare Age

In its report, CBO looks at raising the Medicare age by 2 months a year beginning in 2014; to 67 by 2027. According to their estimates, this change would reduce Medicare outlays by $148 billion over ten years, and reduce the deficit by $113 billion on net as a result of other spending. The difference stems mainly from Medicaid and exchange subsidy spending associated with PPACA (health reform) -- which bills such as Coburn-Lieberman require to remain in place for the age increase to occur.

This policy would also give some people an incentive to remain in the workforce a month longer on average, which CBO estimates would increase the size of the labor force and GDP by 0.1 percent. The effect is relatively modest since "virtually everyone affected would have access to health insurance" so long as PPACA remains in place (CBO notes that the labor effects would be greater if the Affordable Care Act health exchanges do not go into effect).

But what would happen to beneficiaries? CBO projects that about five percent (roughly 250,000 in 2021) of those effected would become uninsured, about half (about 2.8 million) would obtain employer-based coverage, and the remaining 2.3 million would obtain coverage from Medicaid, the health exchanges subsidies, or other government sources. These estimates are somewhat similar to a recent Kaiser study, which according to our analysis found that health care costs would be reduced for most seniors making less than 300 percent of the poverty line -- though total national (public and private) health spending would go up.

Increasing the Social Security Ages

CBO also looks at raising the Social Security retirement ages. Specifically, it looks at raising the early retirement age from 62 to 64 by 2025 for $144 billion in savings through 2021 (but negligible long-term savings) and raising the normal retirement age from 67 to 70 by 2035 for $120 billion in savings. It is worth noting that these changes are quite aggressive compared to what is in the political discussion; but while many current policy proposals would increase the ages more slowly, they also tend to continue age increases rather than halting them at a certain level.

Raising these ages would have a much larger effect on beneficiary behavior than the Medicare age, with each causing people to delay retirement by eight months on average. In the case of the EEA increase, those who would otherwise retire before age 64 are estimated on average to work 11 months longer. As a result, raising the two ages would increase the size of the labor force and therefore GDP by one percent each by 2035 and more thereafter. (CBO does not attribute any growth impact which might occur from increased savings resulting from the higher retirement ages).

At the same time, CBO does show that increasing the ages will reduce Social Security's safety net relative to scheduled benefits (although we've shown that this scenario is unsustainable since Social Security is not solvent over the long-run -- and current law calls for a 23 percent cut in 2036 for all beneficiaries in that year as a result). Raising the NRA would effectively reduce benefits for any given age of retirement since continuing to retire at, for example, 67, would result in a "actuarial reduction" in benefit levels.

Raising the EEA to 64 could also be burdensome for some seniors, since it would no longer be possible to retire at age 63 or 64 without a disability. On the other hand, this delay in collection will actually increase annual benefits (by 10 percent for a person who would have retired at 62) since individuals would face smaller “actuarial reductions.” In addition, to the extent retirees work longer, they will likely have more retirement savings which could further enhance their retirement security.

CBO does suggest that DI and SSI eligibility could be expanded to accommodate those under 64; a hardship exemption such as the one proposed by the Fiscal Commission might be a possible alternative as well.

The Effects of Raising all Three Ages

The fiscal and economic effects of raising the EEA, NRA, and MEA are quite pronounced according to CBO. Taken together, these changes would increase GDP and the size of the labor force by 2 percent by 2035 and 3 percent by 2060. Using a rule of thumb, they find that this would increase revenue by 0.5 percent of GDP in 2035 and 0.75 percent in 2060 -- in addition to the savings on the spending side of the ledger. These estimates come with the caveat that the actual behavior response to doing all these options at the same time can vary from the sum of their individual responses. 

Using CBO's numbers in the report, we were able to reproduce debt held by the public numbers out to 2060 both including and excluding the economic effects. Note that these estimates are very, very rough, so we would definitely not consider them a pinpoint representation of where debt would be, but rather an approximation.

[chart:5495]

According to our estimates, increasing all three ages and excluding economic effects would reduce the debt by about 10 percent of GDP by 2035 and 40 percent of GDP by 2060. Assuming the higher GDP and higher revenue which CBO estimates would occur from these policies, those numbers nearly double -- leading to debt reduction of about 20 percent of GDP in 2035 and 80 percent of GDP in 2060. And even this could be an underestimate since it assumes no economic gains from individuals saving and therefore investing more.

Not a solution to all of our problems, to be sure, but also not a bad place to start.

Note: Updated 1/19 to incorporate information that raising the EEA would slightly increase outlays in the second half of the century